The day after

Sometimes, being left to ones own devices isn't such a bad thing, as Macro Man found yesterday. He started with a nice 55 mile bike ride, soaking up the sun and scenery of a glorious New England spring day (while avoiding the myriad of potholes littering the roads.) He then made delivery on a Christmas present to Mrs. Macro, taking her into New York to see a great show from one of their favourite bands. Oh, and while they were there, his alma mater managed to reel in some sporting hardware (the replay of which he plans to watch after finishing this post.)

Superstitious/dovish/equity bullish readers may wish to recall that the Fed has never raised rates in years in which Duke has won the NCAA basketball tournament (1991, 1992, 2001, 2010, and of course thus far this year.) Of course, over the past 30 years, there haven't actually been that many in which the Fed has hiked rates, so the correlation is as spurious as they come.

Nevertheless, the will they/won't they debate has evolved from "foregone conclusion" to "well, I could envisage a scenario where they don't." To be sure, June is almost certainly off the table, as there are just not enough datapoints between now and that meeting to meaningfully confirm that the recent bout of weak activity is indeed ephemeral.

Macro Man remains of the view that lift-off will occur later this year, and suspects that the bar for raising rates is probably lower than many think. A hospital patient suffering from critical injuries or a virulent illness is placed into intensive care; once the acute phase of the threat to the patient's health has passed, he is moved to a normal treatment protocol without the bells and whistles of the ICU.

After six years in intensive care, the time has surely come for Dr. Yellen and co. to shift the patient down the hall. After all, you never know when you'll need space in the ICU. Macro Man speaks as someone who got off the Oxycontins within 24 hours of each of his ACL surgeries; obviously, some patients do not find it so easy to wean themselves from opiate-based painkillers, ironically developing new health problems from the treatment of old ones.

Similarly, over the last quarter-century, easy Fed monetary policy has been a sort of gateway drug for misallocations of capital, sowing the seeds for each successive iteration of financial crisis. As some commenters have pointed out recently, corporate debt issuance has been roaring thus far this year in what looks to be largely an exercise in balance sheet leveraging to goose EPS. That's not necessarily a bad thing, a priori, if conducted within reason and from a healthy starting point. Unfortunately, economic actors are not known for acting within reason when the tantalizing allure of financial leverage rears its head.

Sometimes you need to be challenged to ultimately succeed. If you have too easy a ride for too long, as the Kentucky basketball team did, you can run the risk of failure when faced with the novelty of being under pressure.

56
comments

Must say I was a bit surprised by your comparison of the US economy to a hospital patient needing to be moved away from the ICU - your previous posts have, shall we say, evoked more of an image of an already recovered patient needing to engage in minor physical therapy, or maybe even a supremely fit cyclist with minor equipment malfunctions.

Perhaps Leftback ghostwrote this one - there was a game to be watched last night after all - congrats on the victory.

I think punters want to run with this 'EM outperformance' ball for a few yards - any avid reader of this space would not be surprised by that, but looks like the mkt was - the problem with contra-secular trades, of course, is that one needs to get the timing of the exit perfectly rt, and I just don't think anyone is good enough for that. Atleast pick India instead of Brazil, for crying out loud..

@ washedup...regardless of my view, I don't think there's much debate that the US economy has been in the ICU courtesy of ZIRP/QE for the last 6 years. And yes, I do think it should be booted to the normal wing post-haste, but acknowledge that the Chief medical officer prefers a cautious approach.

I think we'd all agree that MM et al have forgotten more about Finance than I'll ever know, but I do believe that "this time its different".

With the BOJ engaged in such extreme QQE, ECB QE and PBoC easing (not to mention the other 20+ central bank easings in Q1 this year) do we really think the Fed will go it alone with a rate hike?

Consider the consequences to the USD & exports and thus US corp earnings. Consider the effect on rising rates to corp & govt bonds and equities. Once they correct heavily, consider the impact on jobs and retirement savings.

Let me re-state the problem simply: there is a demographics & employment crisis in the developed world, and having pulled forward demand via a 20yr debt binge politicians and CBs (the two are not different) are now almost out of options. There is no way fin markets can normalise. CBs will keep ZIRP in place for at least another 10 years - maybe longer.

When I hear sensible & intelligent people talking about rate normalisation etc I feel like the kid who shouted "the Emperor has no clothes". Ofc course everyone laughed at the kid until...

"shortages in the securities used as collateral in short-term money markets"

"the broker-dealers that commit to buy, sell and hold portfolios of bonds so that institutional money managers can readily trade them in the secondary market aren’t doing so for anything less frequently traded than Treasury securities or large corporate bonds"

"A lack of Treasury securities is creating bigger swings in short-term rates, making it more expensive and unpredictable for institutions that need overnight finance or which must put excess cash to work."

"the Fed still regularly buys Treasurys and government-backed mortgages to keep a steady balance sheet as existing holdings mature. This privileging of government-backed securities over private debt means that as the European Central Bank now conducts its own government bond-buying program, money fleeing rock-bottom eurozone yields continues to disproportionately seek Treasurys and housing agency debt"

Corporate debt is all priced wrong because they are dependent upon the federal deficit for earnings and their borrowing costs have followed the UST's down.

Everyone has been (is) structurally short UST's and no one wants to admit it.

The GLOBAL economy has been in the ICU courtesy of excess production capacity and debt saturation. The consequence is ZIRP. The prescribed treatment plan has been extraordinary national deficits and experimental CB QE to sustain financial asset prices.

If it isn't readily obvious, the BOJ and ECB have been selected as bagholders for private sector (risk) financial assets.

CBs are not driving zirp. ZIRP terminates when the MM collateral is broadened and/or EU/Japan/Chinese markets are so beat-up that they big money likes the R/R and moves out of USD assets to another market that accounts in another currency.

CBs are not driving zirp. ZIRP terminates when the MM collateral is broadened and/or EU/Japan/Chinese markets are so beat-up that they big money likes the R/R and moves out of USD assets to another market that accounts in another currency.

You really believe that? Fed has bought multiple $T in UST and that does not affect price? And there is nowhere for the capital to flow that is not already very high in price. Hell, JGB's are looking like a solid value now compared to Europe, but we are not supposed to point a finger at CB's?

I think the underlying idea here, that markets drive rates not CB's, has a kernel of truth in it but that does not mean that CB's cannot effect rates. The whole fundamental idea driving global monetary policy, indeed the idea that monetary policy can be this powerful, is all from CB. Inflation targeting, deflation scare, pushing markets around, this is all CB. As will be the mess when something forces their hand to change policy.

Also, Bernanke flat-out said that the Fed can only hope to influence long-term rates. The Fed is holding short-term rates above the real equilibrium rate via the IOR .25% payment. That's why the big savers are at the Fed and not elsewhere.

The Fed can only make that payment if they have the SOMA profits to do so. The probable path is that the whole curve approaches the Fed's .25% floor and the Fed has to dump SOMA holdings to keep it over the .25% IOR floor.

FOMC can start dumping SOMA holdings today, which would cause the curve to get sloppy as rates rose, but it wouldn't be without negative consequence elsewhere.

The real issue is what happens when the SOMA = Currency in Circulation, rates are sub-1% and the political climate is cold toward deficit-spending?

@FM - of course you are correct in highlighting the likelihood that CBs never raise because things never get good enough for them to - and of course in that purely tautological sense its different this time.

What's not different is the usual human greed vs fear cycle - I have a sneaking suspicion that at some point people will take the CB permanent ZIRP as a given, and something else, we don't know what, will start commanding people's attention.

Foe example, I am seeing strong trends in flattening revenues and increasing wages across sectors, and there is something to the idea that margins may plateau or peak soon. For context, its useful to remember that 15 yrs of ZIRP vs a 'normal' rate of say 3%, only 'allows' for an overvaluation of 50% for equities! I am seeing strong trends in flattening revenues and increasing wages across sectors, and there is something to the idea that margins may plateau or peak soon.

FunnyMoney (3:39pm) - I agree, with a couple of minor (pedantic?) caveats:

1. A 25bp rise this year (which may or may not be followed up) would be less about tightening than about saying, "Look guys - we've not really painted ourselves into a corner from which there's no escape". If the economy can't handle that, it should be in the morgue rather than the ICU.

2. I admire anybody willing to link a forecast and a timeline in public. Whilst I wouldn't quibble with your choice of ten years, it's hard to see the wheels not falling off something long before then. Maybe that's another reason for a bit of rate-raising bravado now. Not too much, of course, because in essence you're right - the credit bubble has them screwed.

Apart from the collapse in energy costs, the margins would've already collapsed. Corporate buy-backs are the final stage of equity bulls and we have definitely seen that going, notably, with Apple. Heck, Apple could borrow at Nestle's rates and really move the markets!

This all has to play out and there will be no short-cuts unless Damocles is forced by social unrest that amounts to political disorder.

@washedup I reiterate that the Fed is not holding rates down. The Fed is holding rates up via IOR. To move it up requires the shedding of SOMA assets which will have negative consequences on the economy and will reduce the Fed's ability to pay IOR.

The flattening of earnings is a consequence of the flattening deficit.

All it takes for the US to look better than anywhere else is political chaos in a prospective substitute economy. Remember that because it's a very important concept to appreciate going forward.

@washedup & @Error403 - Thx for the replies; you both make v good points. It's gonna be interesting to see how this all pans out. For the record, I really hope I'm wrong on all my economic views.

@Dan - I'd love to respond but I don't understand anything you've written :) You need to understand that I'm the 'dumb money' on this blog. (Although ZH tells me that 'dumb money' is the new 'smart money' these days so maybe I'll get by...)

Dan, if the Fed is holding rates up by it's payment of ior, (which may be the case, but seems like circular logic to me) then why not hold rates up by actually raising short term rates to the benefit of savers, instead of banks that should not need the free income after 6 years, because there balance sheets are in great shape by now? :-)I'm in the same boat as FM. I don't understand much of what you're saying.

FM, you're not the "dumb money" you're the "Funny money". After all, we need more comedians here...

On that note, LB points out that the power outage in DC might prove to be a positive for the US economy..

I have commented many times here on how reliable the "Japanese playbook" has been. This has been misinterpreted by some as meaning I think the BoJ did all the right things to rouse the Japanese economy, and that QE will "work" in the US. What is intended by this remark is that using the Japanese experience to make predictions about the outlook for rates in the US has been very effective. This is another reason I am in FM's camp about the Fed. The Fed is the new BoJ. They never did hike, in fact they rarely even threatened to. The BoJ cycles between QE, no QE, and QQE. We are sticking with our prediction that an active QE4 program to be in place, early in 2016, quite likely to be announced as early as this summer. One must remember that in the world of ZIRP, the only tools available to push currencies around are QE or jawboning about QE, and on the other hand tapering or jawboning about tapering or hikes.

The noise about hikes has been a con, as I have explained before, just as the BoE conned the market last year and in doing so attracted some capital and tamed UK inflation somewhat with a little sterling spike. The Fed's rate hike con has helped repair the European economies via Euro devaluation, but it has hurt growth in the US via the unjustifiable strength in USD. The very sharp dollar spike was driven by hot money flows into the US and it is fading away now, just as the US macro data continues to weaken.

As far as I appreciate your insight on CBs and confidence on Fed's ability to support equites, I remain cautious on SP at the current level. No new money and no growth for earnings/revenue seemed to really limit the upside potential. I am with LB that the strong $ would be blamed for lack of growth in the coming earning season.

Delaying raising rates can only help bulls so far IMO. The US equity needs either a stronger growth in revenue/earnings or a new QE to make a really bullish case from here. Otherwise, we need a decent correction with reseting expectation.

LB is a bit nervous about old Mr Market. He has closed on the lows a bunch of times in the last three weeks. As we used to say here, Price Is News.

Earnings haven't mattered to the prices of US equities in a long time. We also haven't had so much flow of hot offshore money into the US via ETFs in a long time. Nothing lasts for ever.... trends can reverse.

@LB & @Anon/Farmer - Thx :) And I do hear you both re: equities. However, as mentioned to washedup recently, I remain long (from the last swing lows).

I see 2 initial scenarios here:1. A further upside breakout in equities (to new highs). (Possible bid coming from BOJ/GPIF et al, coupled with further easing from CN). In this case I'll run my posns.2. A re-test of the 2015 SP lows. In which case I'll be stopped out of current US equity length & look to enter any bounce off those lows (with tight stops).

"What is intended by this remark is that using the Japanese experience to make predictions about the outlook for rates in the US has been very effective. "

If you are referring to your secular thesis about long end rates lower for longer in the US (which I agree with), I would be careful carrying it that far - US population will be higher by 120 MM by 2030, and Japan will have contracted by 10 MM - sometimes it really is that simple in terms of future growth 'potential' - I am glad you have been right, but correlation and causation are two different things.

"The very sharp dollar spike was driven by hot money flows into the US and it is fading away now, just as the US macro data continues to weaken."

Hmmm - where did the hot money flows go? US equities are up a whopping 3% since the dollar took off in earnest last september - did they pile into US treasuries thus crushing yields? Better theory, but was the catalyst for that the dollar strength, or was it the wide open gap between US and Euro/japan rates? If the latter, that hasn't really gone anywhere and remains just as enticing - so why would there be a mad stampede out of the US exactly?

Its very simple - if the US slows down below say 1.5% in the next 3 months, as the weaker macro data referred to by you has been worryingly suggesting, the RoW will look like it just stepped off a horse-urine filled jacuzzi shortly after - alternatively, if the wiz kids in silicon valley churn out miracle gadgets and age defying drugs in an accelerated manner (don't hold your breath), RoW will limp along - the relative growth argument isn't going anywhere, and if the dollar weakens it will be temporary - i still see 94-95 as excellent support, and the enthusiasm for EM equities will last as long as the wobble in the dollar lasts.

LB hopes that all those short emerging markets had a nice morning, as we see FXI up 5% and EEM up 3% !!

In other news, if you watch the video from South Carolina and replace the word "police" with 'SS" and "African-American" with "jew", then replace "NSA" with "Gestapo", you'll find that we are in fact living in Nazi Germany, something LB has been worried about for some time. This is getting worse. We are living in full-on fascism in the USA and people are blind to it.

By the way, I have been vilified over my comments about the neo-Nazis in Kiev, but I am not wrong. You will see when the Yatsenyuk government collapses. Ukraine could end up in a very bad place thanks to the neocon meddling. Thanks for another potentially "failed state", Victoria Nuland!

Most of the world's GDP will soon belong to currency areas experiencing falling working age populations. Demographics, especially working age population growth, seems to be the best predictor for longer term inflation outlook.

Can you explain how FED won't be hamstrung by ECB's and BoJ's efforts (and PBOC in a few years time)?

Another year, another bluff from the fed about raising rates. "Several" want to raise in June. I call BS on that. When they start talking about 2016, you know its all a game. Yellen is widely known as a consensus builder. Look at these notes - from the look of it there is very little consensus. No consensus = no action.

DXY ought to give something back - if the run from 80 was a response to the "liftoff". UST's vs everything else developed look too weak. 10yr@1.9 with the rest of the world closer to zero? That makes no sense.

@ LB, one can certainly note the fascist tendencies of the US police/security apparat without invoking Godwin's Law.

@ Anon 7.10 I certainly concur that demographics will reduce the rate of trend growth as things currently stand. On the other hand, reducing the supply of labour could, ironically, mitigate deflationary forces if one believes that excess labour supply is the primary driver of disinflation today. (Such an argument would require reduced labour forces in precisely those regions that serve as the source of excess labour today, which I don;t think is necessarily the case.)

Regardless, if one posits that there is an implicit nominal GDP target from central banks, and trend nominal GDP should be lower, what are the implications?

Well, if the monetary authorities hold to outdated targets that have scant probability of being met in the long term (ie core PCE of 2%), then yes the implication is egregiously easy monetary policy as far as the eye can see. Of course, the unintended consequence of that is to propagate financial bubbles, which are also undersirable.

An alternative is to lower the policy target to some more realistic measure that accounts for the secular state of the world. Perhaps this is what will happen in the long run.

In the interim, with unattainable policy targets, CBs can shade policy towards the accommodative side (and lower the perceived equilibrium long-term policy rate, as they have done), but in mind mind this does not necessitate ZIRP. A positive return on cash, even if it is modest, is IMHO systemically important to provide an alternative to taking excess market/credit/duration risk to generate a positive financial return, to dissuade bubbles from forming.

I have to laugh at some of the commentary here and elsewhere, which seems to imply that not only is the foreign outlook a major factor (it is- just look at today's minutes!), but the ONLY factor that should drive the Fed's process. Should Yellen need to obtain a signed affadavit from the ECB, BOJ, PBOC, BOE, Bacen, etc granting her leeway to move on rates?

Personally I don't think so. And remember- just because you're off the Oxycontin doesn;t mean you can't pop the odd aspirin or Tylenol/paracetemol!

@T :"DXY ought to give something back - if the run from 80 was a response to the "liftoff"."

The run from 80 has not been a response to any US liftoff as much as it has been the policies adopted by ECB and BoJ to depreciate their currencies, although clearly the former has helped some - since QE doesn't work directly anyway, currency depreciation is really the only mechanism left to bolster growth (at the expense of someone else, obviously) - so the US dollar is currently just the toothpaste that comes up when the tube is squeezed,much like the euro was le colgate when we tried QE. I will let you be the judge of whether ECB and BoJ are likely to end their QE program - barring that, I don't think the dollar would go down unless the Fed starts another QE, even if rates stay at zero - again, I don't claim any expertise in predicting if that happens - clearly LB would tell you that it could start next Tuesday, and MM would offer you a bridge in brooklyn if you bought that!

I suppose I agree with most of what you said, but...it seems that you hold the optimistic view that the trend nominal growth will remain positive. I'm more pessimistic and think we'll see a sustained slump to negative in Europe, and more of the same in Japan. In that case ZIRP is still going to be too restrictive.

USA will import this problem, even though its demographics are ok. @ 0.7 $ per € or lower, soon most Americans will drive German cars... It's not the only factor for FED to consider by any means, but it's a constraint and I think much larger than most think, and above all permanent.

Also It seems like demand falls faster than labour supply. Japan needs close to 10% gdp deficit to keep full employment and still doesn't get inflation beyond cost push. We'll never see such stimulus in Europe either.

My point is the "recovering" patient USA is tied with a chain to 3 patients (Euro, Japan, China) who are going to morgue long term unless they start "printing babies". Oxycontin/tylenol won't change prognosis. It's just palliative care.

Interesting. I hope people are not overthinking the market. Dudley's little speech was interesting. I know I keep reading all the reasons why "the Fed can't tighten"...but they've removed much of the dovish language. Careful. If the first tightening occurs in June, it won't surprise this bubba.

I don't know but sold some modest itm calls through earnings. It just seems a bit weary, don't know if there are really too many catalysts for guidance improvements and the $ will no doubt be playing a major role in any possible guidance disclaimers. Not expecting anything super dramatic, but if this market wants to continue rallying on the back of strengthening dollar then be my guest, I'll be happy to retain the currency. And besides, there was some hawkish gibberish again today about a "lower hike goal bar" as I think MM noted, should be effectively more short term pain for corporate America.

I think we should all stop obsessing about the Fed for maybe a week while we look at earnings. Can we do that?

A lot of people have asked how there might be a mini capital flight from the US in Q2, as I have suggested. Try this on for size:

Weakening EPS in US, punters sell Spoos and Qs, late arriving punters start losing money, and many offshore punters are also already down on the currency side due to soft US macro. This begets more selling of Spoos, which begets unwind of USDJPY carry. The amplified currency effect now starts to impact offshore UST punters and they lose money, which begets more selling of all things USD-denominated in a simple reversal of the 2014 Trade Du Jour. Newton meets reflexivity.

I'll take back Nazi Germany, MM and offer Mussolini's Italy of the mid 30s. Crony capitalism writ large, much corruption, carabinieri and a few death squads offing unpopular groups and minorities. You can scoff all you want but why not sit down for a chinwag with a black American one day? It might really open your eyes. Ever heard of SBI (Segregation by Incarceration)? Google it and see what you can learn. Some of you really need to widen your range of inputs. If the American people don't get a grip of this now and take back the country from these thugs then things will get much much worse. There is nothing sophomoric about wanting to defend the constitution.

and you would not have expected such to worsen under a black president, would you. Obama has succeeded in the incredible feat of making America worse than Bush America

i will say one more time, Hunter Thomspon should be here to go apeshit on this. Where are the 'intellectuals'. Where is the resistance? Tabby does a little on his side, they made an Oscar documentary on subprime, that not one Amerrican friend has seen. And that is only covering financial cronyism.

Do you know any talented writer covered US nascent fascism at large? IF so i am interested, always, pass him or her along

LB would weep for those poor souls who were short China and emerging markets if he wasn't busy enjoying his P/L and laughing so hard.... mind you the China part will eventually end badly. Always does, but what this Chinese stock mania may be telling us, fiscal stimulus is ahead. After all, if Europe and US had smart politicians, isn't this what we should be doing instead of QE?

To follow that up, Mark Mobius is now making a call for commodities, echoing our very own Polemic in many ways in reminding us that inflation isn't dead, just sleeping. Look, global growth is slow, but China is still a big country using a lot of resources and the world isn't ending. #TWINE, as one might say if one tweeted.

In the calendar years that followed the big Long Bond rally years (2008, 2011), the best performing asset class was emerging markets. The best the following year was commodities. Mini-cycles. 2014 was another banner year for Long Bond, and that drove our call for EMs in 2015. So far, so good.

Don McLean's manuscript for "American Pie" went up for auction at Christie's on Tuesday and sold for $1.2 million, and though he's never really spoken publicly about the song's cryptic meaning, he somewhat spilled the beans in the auction house's catalog.

"Basically, in 'American Pie' things are heading in the wrong direction," McLean said in the interview. "It is becoming less ideal, less idyllic. I don't know whether you consider that wrong or right, but it is a morality song in a sense. I was around in 1970 and now I am around in 2015 … there is no poetry and very little romance in anything anymore, so it is really like the last phase of 'American Pie.'

It's become clear that the Fed are unpatriotic and wish to see American businesses fail, exports whither, and US citizens facing a life on welfare. This USD bid tone is tedious, so I shall withdraw to the sidelines. As regions such as EU/Asia print into oblivion, we will see Yellen lose her job and the govt install a new Fed chair; a real money printer, a man of calibre. (I have nominated Mr Gideon Gono - of the RBZ (Zimbabwe) for the job).

A customer of the premises raided has claimed an alarm went off at the site at 1pm on Good Friday but the building was not fully checked.

Norman Bean, who stores around £35,000 worth of jewellery in his safe, said: 'I came down and spoke to a security guard today. He said he came on Friday, the alarm was going off. He went downstairs, looked through the door, through the windows and couldn't see anything and came out again, that was it.

@LB, regarding China's stock market, well I guess that they are copying Fed and JCB's models, in such a closed system. They might just find out that they can pop up the stock market as long as they want, i.e., PBOC buying stocks directly? I, for one, do not know how this is going to end, considering the fact that we have not seen the end game of SP and Nikkei yet.

@anon 7pmI have never been to London. But my impression is that there are so many surveillance cameras in the city that everyone is forever watched. Correct me if I am wrong, shouldn't the police already have the robbers in custody by now? BTW, I expect a movie based on this heist coming out in 2016...

While more philosophy thatn fact I think a lesson we have learned in the US is that policy that pushes markets higher a) leads to greater income inequality and b) never trickles down via wealth effect. I can't imagine China leadership wanting (a) even with the prospect of (b). Occam's razor says that the hot money in the country has moved from real estate to stocks. Wouldn't have wanted to be short Shanghai real estate in 2007. HangSeng is at about 12x NFY earnings, vs close to 18 (and rising) for the US. Maybe HSI is a smart way to play EM stocks without the USD vols?

Question - if US earnings reports stink, is that bullish or bearish for spoos?

"A Bloomberg Intelligence analyst who just completed a tour of the country {China}.What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”The China Steel Profitability Index compiled by Bloomberg Intelligence barely rose in March, a time after the annual Lunar New Year when demand would usually surge, and so far this month has resumed its decline. Steel use this year is down 3.4 percent, after slumping as much as 4 percent in 2014, according to BI. It had steadily risen for more than a decade."

"On weekend afternoons, large crowds descend on a pair of street corners across from People's Square in downtown Shanghai to trade stock tips. Shen Yuxi has set up a homemade desk with two laptops, a big flat screen and offers insights like this:

"When a Communist Party chairman takes office, I buy stock in companies from his hometown," Shen tells a crowd of about 20 people that spills out over the sidewalk.

Recently, Shen has been buying up companies in Shaanxi, the home province of Xi Jinping, who serves as general secretary of China's Communist Party."

"The rapid ascent has naturally sparked concerns the market may be getting overheated. While the vertiginous rise means investors need to be wary of any pullback, there are good reasons why Hong Kong’s stock market is attracting so much interest. As highlighted by Barron’s Asia in late March, increasing flows of institutional money from China have been moving into Hong Kong. These funds have been buying the Hong Kong-listed, or H shares, rather than the mainland-listed shares, or A shares, of companies listed in both markets."

"While some investors might be tempted to take profits on the back of the quick gains scored over recent days, the flow of money from the Stock Connect link established between the two markets last year, coupled with still attractive valuations, could push Hong Kong stocks higher over coming weeks and months. The Hang Seng China Enterprise Index, which is gauge of H shares, trades at 10 times earnings compared to 19 times that the Shanghai Composite Index fetches. Investors also gain exposure to Hong Kong’s stricter regulatory regime and shares denominated in the more liquid Hong Kong dollar."